Following an eventful month in monetary and forex policy, Brown Brothers Harriman says, based on a summary of the many central bank policy changes in January, that this is a race to lower rates, “not a currency war.” The report notes that unlike a true currency war, which is a ‘zero sum game,’ lowering interest rates boosts demand and thus not a zero-sum game. “In addition, currency weakness is not uniformly welcome among countries with an easing bias – some because of high inflation problems, other because of financial stability concerns,” it adds. BBH analysts also say that the rate moves made in January are not enough to explain the currency performance in certain countries. “India unexpectedly cuts rates, but the currency appreciated. On the other hand, the currencies of Canada and Egypt fell 7.5% and 6%, respectively, in the wake of their surprise cuts. Three of the five countries that hiked rates in January had a weaker currency afterward. And the move in the Swiss franc was a different case, of course,” they say, adding that they expect more countries to ease monetary policy in the coming months. “History may prove that many of these surprise rate cuts were premature, especially if currencies continue to weaken – Turkey and Russia are good examples.”
